Suppose That You Took Out a $1,000 Loan in January

question 94

Multiple Choice

Suppose that you took out a $1,000 loan in January and were required to pay $75 in annual interest.During the year, inflation was 6 percent.Which of the following statements is correct?

• A)The real interest rate is 6 percent and the nominal interest rate is - 1.5 percent.
• B)The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.
• C)The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
• D)The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.
• E)The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.

---

Definitions:

Interest Rate

The percentage of a loan amount charged by a lender to a borrower for the use of assets, typically expressed as an annual percentage.

Miller-Orr Model

A financial model used for managing cash flows and cash reserves, focusing on maintaining balances within certain limits at minimum cost.

Upper Limit

The maximum value or level that is allowed or attainable in a given situation.

Miller-Orr Model

A financial model used to manage cash balances by setting upper and lower limits on cash reserves within which no financing is needed.